Technology Stocks Cheapest to S&P 500 as UBS Sees Gains

Computer and software shares have slumped to the lowest valuations in two decades, a sign to Barclays Wealth and UBS AG they will rebound as Standard & Poor’s 500 Index companies start spending their record cash.

Technology companies in the benchmark index for U.S. equities fell as much as 17 percent this year, pushing prices down to 15.6 times reported annual income, according to data compiled by Bloomberg. The biggest industry in the index hasn’t been this cheap since at least 1992, excluding the six months between Lehman Brothers Holdings Inc.’s bankruptcy and the start of the bull market in March 2009.

Falling valuations and a rebound in spending may lift shares even if U.S. growth slows, according to UBS. Corporate cash rose six straight quarters through March, boosting speculation executives will upgrade computers after reducing investments for three years. The S&P 500 Information Technology Index rose 5.6 percent last week, the biggest gain in a year.

“The technology sector has been overlooked,” said Kevin Gardiner, who helps oversee $241 billion as head of global investment strategy at the wealth management division of Barclays Plc in London. “One of the sectors that we have been quite positive on globally has been technology, and we’ve been gritting our teeth and hanging onto that view.”

Intel, Qualcomm

Intel Corp., the biggest maker of semiconductors, is projected to post the highest growth in net income since at least 1990, and Qualcomm Inc., the largest phone-chip producer, will have the fastest increase in six years, according to the average analyst estimates. Each has at least $11 billion in cash and short-term investments. The technology industry has more money available than any S&P 500 group, giving management leeway to invest in new products, buy shares or raise dividends.

Apple Inc., the Cupertino, California-based maker of iPads and iPhones, and Intel are among 29 technology firms in the S&P 500 scheduled to release quarterly results in the next two weeks. New York-based Alcoa Inc., the largest U.S. aluminum producer, started earnings season today after reporting second- quarter profit that topped analysts’ projections as higher metal prices boosted sales.

The S&P 500 gauge of computer companies and software developers may earn $26.40 a share this year, or 32 percent of the overall benchmark’s $81.61 a share, the average analyst estimates tracked by Bloomberg show.

Weekly Rally

The S&P 500 rose the most in a year last week, jumping 5.4 percent to 1,077.96, after higher-than-estimated sales from retailers and speculation European banks will prove solvent in government evaluations eased concern about the global economy.

The stock index is down 11 percent since reaching a 19- month high in April amid speculation Greece, Portugal and Spain may struggle to close their budget deficits. The gauge rose 0.1 percent to 1,078.75 today. Technology shares posted the biggest gain among 10 industries, climbing 0.7 percent as analysts recommended buying SanDisk Corp. and Qualcomm.

“It just comes down to this macro viewpoint that we’re going into a double-dip recession, and the world’s going to go to hell, and people are going to stop buying iPads and smartphones and computers,” said Paul Wick, the Menlo Park, California-based manager of the $3.3 billion Seligman Communications & Information Fund, which beat 90 percent of rivals in the past five years. “That’s kind of a farfetched conclusion.”

Trailing the Market

Technology companies trailed the S&P 500 for seven of nine years through 2008, including a 44 percent plunge that year, when U.S. stocks posted their worst return in seven decades.

They surged 60 percent in 2009 after the first global recession since World War II ended and investors speculated an improving economy would spur companies to buy new routers and database programs. This year, the group has slumped 5.9 percent versus the S&P 500’s 3.3 percent drop.

Valuations for S&P 500 computer producers, software developers and chip makers are lower than at 96 percent of the time since 1992, Bloomberg data show. Using analysts’ estimates for 2010 earnings, the group is even cheaper, at 13.2 times projections. That’s the lowest multiple compared with the S&P 500 since Bloomberg started tracking the data in 2006.

Traxis Partners LP’s Barton Biggs, whose flagship fund returned three times the industry average last year, said he sold most of his U.S. technology holdings two weeks ago on signs the economy is weakening. Biggs, who manages $1.4 billion, was among the first to predict the stock market rebound from March 9, 2009, and his fund profited by adding stocks in emerging markets and technology shares during the rally.

‘Very Selective’

“You need to be very selective among technology stocks,” said Brian Jacobsen, chief portfolio strategist for the mutual fund division of Wells Fargo Asset Management, which oversees $465 billion in San Francisco. “My biggest concern is the overall growth of the U.S. economy and of Europe, since those tend to be the largest purchasers of technology.”

Private employers added fewer jobs than forecast last month and orders at factories fell 1.4 percent in May, the most since March 2009, U.S. government reports released July 2 showed. Economists have cut growth estimates for U.S. gross domestic product next year to 2.8 percent, from 3.1 percent in May, based on the median economist estimate compiled by Bloomberg.

U.S. firms are increasing spending on computers and software, according to a Goldman Sachs Group Inc. index of estimated technology purchases that rose to 56 last month. A reading of more than 50 indicates expansion, while lower than 50 is a contraction. The measure dropped to a low of 25 last year, compared with 80 in 2005, data from the New York-based investment bank showed.

New Projects

Technology profit may get a boost if U.S. businesses start using cash for new projects, said Bruce Bittles of Robert W. Baird & Co. S&P 500 companies have piled up cash for the past six quarters, the longest stretch in seven years, as they eliminated jobs and cut dividends during the recession. They held $836.8 billion on March 31, a 29 percent rise from September 2008, data from New York-based S&P show.

“Tech stocks have some of the strongest balance sheets in the S&P 500,” said Bittles, chief investment strategist at Milwaukee-based Baird, which oversees more than $85 billion. “The valuations are inexpensive -- that’s another plus. It’s a good time to invest in tech.”

The companies have an average $2.28 billion in short- and long-term debt, according to regulatory filings compiled by Bloomberg. That’s lower than any other industry and compares with $6.29 billion for the average S&P 500 member, excluding banks and financial institutions.

Growth Estimates

Wall Street firms raised 2010 profit-growth estimates for technology companies by 17 percentage points since the end of 2009, faster than all S&P 500 industries except financial institutions. Income will rise 42 percent this year, compared with 34 percent for the S&P 500, more than 8,000 analysts’ estimates compiled by Bloomberg show.

“We’re in the midst of a pretty strong earnings recovery,” said Chip Miller, a New York-based equity strategist for UBS. “Tech fundamentals thus far have remained strong. Given how cheap they are, if you take a little bit of a longer- term perspective, it’s probably a good buying opportunity.”

Analysts’ estimates show Intel will more than double profit this year. The Santa Clara, California-based company trades at 11 times the average per-share earnings estimate for this year from analysts, lower than the valuation for the S&P 500, whose companies will increase profit by 34 percent.

Multiple Compression

While projections show Qualcomm’s net income may rise the most since 2004, shares of the San Diego-based company have slumped 24 percent in 2010. It had a price-earnings multiple of 16.8 at the end of last week, using profit from the past year. The valuation has been this low during only one other period: the end of 2008, after Lehman collapsed.

Qualcomm was added to the conviction buy list at Goldman Sachs today. The phone-chip maker will benefit from a growth in smart phones, including Google’s Android-based phones, 80 percent of which contain Qualcomm chipsets, Goldman Sachs analyst Simona Jankowski wrote in a note to clients.

“Among the large-cap names, they’re really in an absolute sense all cheap,” said Howard Ward, a fund manager at Gamco Investors Inc., which oversees about $26 billion in Rye, New York. “I’m loaded with these large-cap tech names because they’re too compelling to ignore.”

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Lynn Thomasson in New York at lthomasson@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net.

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